Higher Fines for Gun Jumping in Mergers – The European Commission’s Continued Emphasis on Procedural Merger Compliance
Last month’s Commission decision to impose a fine of €124.5 million on Altice for gun jumping is a stark reminder of the need to establish processes to ensure against conduct that can be characterized by the merger control authorities as violating the “hold-separate” obligation of the EU Merger Regulation (“EUMR”). That obligation prohibits parties to transactions that are subject to the EUMR from prematurely coordinating their activities or receiving the benefits of ownership—i.e., “jumping the gun.” (Altice has announced that it will appeal the Commission’s decision).
According to the Commission’s decision, in February 2015, Altice notified its planned acquisition of PT Portugal to DG Competition. In April 2015, the regulator granted conditional approval, making the transaction subject to the divestment of certain subsidiaries. Two years later, in May 2017, the Commission issued a Statement of Objections, in which it claimed that Altice had implemented certain aspects of the acquisition of PT Portugal without waiting for final clearance, and in relation to certain elements, before it had filed its notification.
In its April 2018 decision, the Commission concluded that Altice breached the “hold-separate” obligation in the EUMR. In particular, the Commission concluded that:
- In the purchase agreement, Altice had been given the right to exercise “decisive influence” (the relevant EU standard) over PT Portugal by acquiring pre-closing veto rights over certain of the company’s ordinary business decisions. Whilst it is not unusual to contractually ensure the preservation of the value of a target between signing and closing, under relevant EU regulations such arrangements may not grant rights which exceed those enjoyed by minority shareholders for the preservation of their financial interests.
- Altice had exercised decisive influence over aspects of PT Portugal’s business by giving PT Portugal instructions on how to carry out a marketing campaign.
- Altice had sought and received detailed commercially sensitive information about PT Portugal outside the framework of any confidentiality agreement.
The Commission expressly emphasised that its 2018 enforcement decision did not impact on its decision clearing the transaction in its 2015 clearance decision. The facts giving rise to the gun jumping infringement did not affect the Commission’s assessment of the substance of the transaction made in 2015.
European competition authorities have investigated and enforced the prohibition against gun jumping with increasing vigour over the last decade, and it is now clear beyond doubt that findings of infringement can have very significant consequences for the companies involved. In the past, the EC has imposed fines in two decisions – Electrabel (2009) and Marine Harvest (2014), each of which gave rise to a fine of €20 million. The Commission is also currently investigating Canon for possible gun jumping, related to the use of a “warehousing” two-step transaction structure.
In its Altice decision, DG Competition justified the significant €124.5 million fine for breach of the “hold-separate” obligation by reference to (i) “serious infringements” which it concluded had undermined the effective functioning of the EU merger control system; and (ii) the need to send a strong message to deter other companies from gun jumping. In practice, therefore, merging undertakings must be vigilant not to fall foul, even inadvertently, of the gun jumping prohibition – and should ensure that they adhere closely to the permitted rules of engagement while final clearance remains outstanding.
One practical take-away from the Altice decision is the value of putting in place appropriate confidentiality and “non-disclosure” agreements, and perhaps a “clean-team” structure where the parties are competitors, to enable the disclosure of competitively sensitive information for legitimate due diligence and integration planning. Competition authorities acknowledge the need for merging parties to exchange confidential information in the context of a transaction, but safeguards must be put in place, especially when the parties are competitors. In some cases, it may be advisable that the most commercially sensitive information is only exchanged via third parties. It is also regarded as good practice to engage competition counsel to review and assess any interim operating covenants , and in particular any approval and veto rights, that the parties intend to include in their transaction agreement, to ensure that such provisions do not overstep the limits prior to the merger approval or raise potential decisive influence questions (even where this is not the intention or objective).
This is an area of competition law enforcement that merits continued monitoring. Recent enforcement actions notwithstanding, the precise scope of the EUMR stand-still obligation for merging firms is currently under review before the Luxembourg Courts. As indicated, Altice has also announced that it will appeal the Commission’s decision. And finally, the European Court of Justice is expected to rule in another gun jumping case (Case C-633/16), referred from a Danish Court and recently opined on by Advocate General Wahl. In that case, the Commission has argued in support of the Danish Government that conduct does not have to form part of the process leading to the actual change in control in the target in order to constitute improper gun jumping. AG Wahl, on the other hand, recommended that the Court of Justice should define the scope of the “standstill obligation” more narrowly. In particular, he has taken the position that prohibitions against gun jumping should exclude measures which – although taken in connection with the process leading to a concentration – precede and are severable from measures actually leading to the acquisition of the possibility of exercising decisive influence on a target.